U.S. equities reversed course in the final hour of trading and finished lower, erasing solid early gains and adding to weekly losses. Volatility that has marred action all week has come amid increased expectations that the Fed is set to get more aggressive in the wake of persistent inflationary pressures. News on the economic front was mixed, as manufacturing in the Philadelphia region moved further into expansion territory, but weekly initial jobless claims increased more than expected, continuing to bounce off its post-pandemic low, and existing home sales declined for the first time in four months. In equity news, Dow member Travelers Companies topped Q4 earnings estimates, Union Pacific bested the Street's expectations on double-digit revenue growth, while United Airlines and American Airlines both posted quarterly losses that were narrower than what was predicted. Treasuries were mixed, and the U.S. dollar moved higher, while gold lost ground, and crude oil prices traded modestly to the downside. Europe finished mostly higher with Tech stocks leading the way, while markets in Asia were mixed after China lowered its loan prime rates.

The Dow Jones Industrial Average fell 313 points (0.9%) to 34,715, the S&P 500 Index dropped 50 points (1.1%) to 4,483, and the Nasdaq Composite declined 186 points (1.3%) to 14,154. In heavy volume, 4.5 billion shares of NYSE-listed stocks were traded, and 5.0 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.25 to $85.55 per barrel. Elsewhere, the gold spot price declined $4.30 to $1,838.90 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.3% to 95.80.

United Airlines Holdings Inc. (UAL $43) posted an adjusted Q4 loss of $1.60 per share, less than the FactSet estimate calling for a shortfall of $2.09, on revenues of $8.2 billion, above the Street's forecast of $7.9 billion, but down roughly 25% compared to the same period in 2019, before the COVID-19 pandemic began. The company said capacity was down 23% compared to the same period in 2019, and total revenue per available seat mile, a key industry metric, was 3% lower. UAL said it achieved every major financial guidance target for the fourth quarter despite the rise in COVID-19 cases caused by the omicron variant, and noted that despite near term volatility, bookings for spring travel and beyond remain strong. Shares traded to the downside.

American Airlines Group, Inc. (AAL $17) reported an adjusted Q4 loss of $1.42, less than the $1.46 shortfall that was estimated. Q4 revenues were $9.4 billion, mostly in line with estimates, but down 17% compared to the same period in pre-pandemic 2019. The airline company said that based on current trends, it expects Q1 capacity to be down 8% to 10% compared to the Q1 of 2019 and revenue to be down approximately 20% to 22% compared to the same period. Shares were lower.

Dow member Travelers Companies Inc. (TRV $165) reported Q4 core earnings-per-share (EPS) of $5.20, topping the $3.86 estimate, with quarterly revenues rising 7.3% year-over-year (y/y) to $9.0 billion, above the Street's forecast of $7.7 billion. The insurance company noted that the core income increased primarily due to higher net investment income and a higher underwriting gain. Shares were higher.

Union Pacific Corporation (UNP $242) announced Q4 EPS of $2.66, above the expected $2.61, with revenues rising 12% y/y to $5.7 billion, topping the estimated $5.6 billion. The rail transportation provider noted that despite the ongoing global supply chain challenges that impacted volumes, it concluded its most profitable year in 2021, and sees a positive demand environment in 2022. Shares finished to the upside.

Higher compensation costs have been a theme recently, amid inflationary pressures and tight labor market conditions. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, We Can Work It Out: Update on Labor Market, the labor market remains tight—hence the stepped-up pace of balance sheet tapering by the Federal Reserve, and the market now expecting multiple rate hikes this year.

She provides one historical nugget of truth to keep in the back of your mind as the Fed embarks on its rate hiking cycle: in the post-WWII era, every time (12 occurrences) that the Fed was raising rates—and the three-month moving average of the unemployment rate rose by at least .35 percentage points—a recession has unfolded. For now, Liz Ann notes that the good news is that the unemployment rate continues to descend; but keen observers will understand the potential economic implications of an eventual turn back up—especially if rate hikes are still underway.

Find all our market commentary on our Market Insights page and follow us on Twitter at @SchwabResearch.

Initial jobless claims unexpectedly increase and existing home sales drop

Weekly initial jobless claims (chart) came in at a level of 286,000 for the week ended January 15, versus estimates of 225,000, and versus the prior week's upwardly-revised 231,000 level. The four-week moving average increased by 20,000 to 231,000, and continuing claims for the week ended January 8 increased by 84,000 to 1,635,000, above estimates of 1,563,000. The four-week moving average of continuing claims fell by 55,250 to 1,664,250.

The Philly Fed Manufacturing Business Outlook Index (chart) moved further into expansion territory (a reading above zero) for January. The index increased to 23.2 versus estimates of an increase to 19.0 from December's 15.4 level.

Existing home sales decreased 4.6% month-over-month (m/m) in December to an annual rate of 6.18 million units, snapping a three-month winning streak, and versus the Bloomberg expectation of 6.42 million units, after November’s upwardly-revised 6.48 million rate. Existing home sales were lower in all four major U.S. regions both on a m/m and y/y basis. Sales of single-family homes and of condominiums and co-ops were lower from the both the prior month and year. The median existing home price was up 15.8% from a year ago to $358,000, marking the 118^th straight month of y/y gains. Unsold inventory was at a 1.8-months pace at the current sales rate, down from the from the 2.1-months pace a year earlier. Existing home sales reflect contract closings instead of signings and account for a large majority of the home sales market.

National Association of Realtors Chief Economist Lawrence Yun said, "December saw sales retreat, but the pull-back was more a sign of supply constraints than an indication of a weakened demand for housing," adding that, "Sales for the entire year finished strong, reaching the highest annual level since 2006." Yun noted, however, that he does expect existing-home sales to slow slightly in the coming months due to higher mortgage rates, but that recent employment gains and stricter underwriting standards are in place to help mitigate the danger of home sales "crashing."

Treasuries were mixed, as the yield on the 2-year note was up 3 basis points (bps) to 1.04%, while the yield on the 10-year note was flat at 1.83%, and the 30-year bond rate ticked 1 bp lower to 2.13%.

Treasury yields have moved higher, but the curve has flattened as of late with the short end rising much more than the medium-to-longer end. The flattening has occurred as the markets grapple with how aggressive the Fed will be in its response to combating surging inflation and what the implications on economic growth could be. Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest article, The Fed's Policy Tightening Plan: A One-Two Punch, how beginning quantitative tightening soon after rate hikes is a big departure from the Federal Reserve's past policy.

The only item on tomorrow's economic calendar is the Leading Economic Index, forecasted to have increased 0.8% m/m during December, following November's 1.1% rise.

Europe mostly higher amid Tech gains, Asia mixed after China rate moves

European equities finished mostly higher, with the Information Technology and Utilities sectors leading the way, with the former rebounding from a recent selloff that has come amid rising global bond yields and increased expectations of tighter monetary policies. Meanwhile, Energy issues declined following a recent run to keep the overall gains in check. Despite the omicron variant continuing to affect supply chains and the persisting inflationary pressures, European Central Bank (ECB) President Christine Lagarde suggested in a recent interview that the ECB may not act as quickly and as abruptly as the Fed might. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, What Do Rising Rates Mean for Stock Investors?, how recently, U.S. Treasury bond yields climbed back to their pre-pandemic levels and in Europe, German 10-year yields climbed to near 0%, touching their highest level since May 2019. Jeff asks the question of what are the implications of rising global yields for stock prices? He points out that increasing yields could help lift stocks and may even signal outperformance of cyclical European stocks and value stocks.

In economic news, German producer prices for December came in hotter than expected, increasing 5.0% m/m and 24.2% y/y. However, Eurozone CPI was in line with expectations, showing a 0.4% rise m/m and a 5.0% y/y gain. French business confidence declined in January, but manufacturing confidence rose. The euro was little changed versus the U.S. dollar, while the British pound gained ground against the greenback. Bond yields in the Eurozone and the U.K. were lower.  

The U.K. FTSE 100 Index ticked 0.1% lower, while Germany's DAX Index and Italy's FTSE MIB Index advanced 0.7%, France's CAC-40 Index and Switzerland's Swiss Market Index increased 0.3%, and Spain's IBEX 35 Index was up 0.5%.

Stocks in Asia finished mixed with Hong Kong shares rising sharply after the People’s Bank of China (PBOC) cut its loan prime rates. Recent volatility and the concerns around inflationary pressures have bolstered expectations of tightening, except for in China which lowered its 1-year medium-term rate earlier this week and announced cuts to its 1-year and 5-year loan prime rates last night for the first time in nearly two years. The one-year rate was reduced by 10 bps to 3.7% and the 5-year rate was cut by 5 bps to 4.6%. In other economic news in the region, Australia’s unemployment rate unexpectedly declined in December to 4.2%, and the headline employment figure rose more than expected, while Japanese exports were higher than expected in December, registering an increase of 17.5% versus the 15.9% y/y expected rise. 

As noted in our latest Schwab Market Perspective: Bumps in the Road, the effects of the COVID-19 virus have continued to drive—and brake—economic growth. Stocks sank in early January as investors reacted to the fast-spreading omicron variant and the Federal Reserve’s signals around inflation, including the possibility it will begin "quantitative tightening" much faster than previously expected. However, there are signs that inflation pressures already may be peaking in the United States and Europe.

Japan's Nikkei 225 Index rose 1.1%, with the yen unchanged versus the U.S. dollar, China's Shanghai Composite Index declined 0.1%, and South Korea's Kospi Index increased 0.7%. Australia's S&P/ASX 200 Index traded 0.1% higher, and India's S&P BSE Sensex 30 Index dropped 1.1%. Hong Kong shares were sharply higher, with the Hang Seng Index rising 3.4%.

Tomorrow's international economic calendar will be fairly light, offering only CPI out of Japan, consumer confidence and retail sales from the U.K., and consumer confidence from the Eurozone.